Tuesday, February 2, 2010

Scalping: another explanation

We've puzzled here at Offsetting about ticket scalping for rather some time. Porter and Thomas in the latest Southern Economic Journal give another potential explanation. If stadiums are mainly in the game of harvesting government subsidies rather than maximizing on ticket revenue, then having below market clearing ticket prices can make voters happier about the subsidy.
Using public choice analysis, we determine how government subsidies affect location and pricing decisions of sports teams. We explain how voter referendums can create suboptimal outcomes for local communities and identify winners and losers in sport team subsidies. ... Sport subsidies generate additional revenue for owners and players at taxpayer expense, and non-fan taxpayers subsidize both the team and fans. To increase political support for subsidies, teams lower ticket prices below the apparent profit-maximizing level, which may cause inelastic ticket prices and ticket shortages.
Most tellingly, they find large increases in ticket prices after referenda on new stadiums but before the new stadium is built.

This may explain some cyclical variation, but underpricing seems more an equilibrium phenomenon for some teams even well away from any subsidy vote. And, unless the venues are demanding that concerts renting the space not charge too much for tickets, it also fails to explain equilibrium underpricing in other related markets. I'm not sure we need a single grand unified theory here though. Concert underpricing reflected that it was a loss-leader for CD sales back when intellectual property was enforceable; sports game underpricing can partially reflect that the stadium is in a longer-run political game.

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